If you are trying to get your student loans into an
income driven repayment plan, one of the first
questions you will face is “How do I prove to
the Federal Government what my income is?
Your income, after all, is the most important factor in
what the monthly payment will be for any IDR plan.
Generally speaking, there are two ways of proving
income: current documentation, or prior tax returns.
The documentation method works just like it sounds. Along
with your application, you supply a document (typically
a pay stub for most graduates with a job), and the servicer
who processes your application uses that to calculate income
If you are sending in a tax return instead, the key
figure is your adjusted gross income. That is found
on line 37 of IRS for 1040, line 21 of form 1040A,
or line 4 of form 1040EZ.
It is worth while to remember what “adjusted gross income”
is: AGI is your total income for wages, salaries, and business profits.
To this base number is added: interest, dividends
capital gains (i.e. profits on investments), IRA distributions,
the taxable portion of social security benefits (typically this
will involve a senior citizen still working part or full time),
rental income, and unemployment checks.
Subtractions include some self employment payments
money you contribute to your IRA, alimony paid, and any
student loan interest if you have been making payments on
your loans.
Make all those additions and subtractions, and you
have your adjusted gross income.
A couple of points buried in the details: First, if you
choose to submit a tax return as proof of income,
remember that by definition, tax returns are snapshots
of what your income was at some point in the past.
If your income has been rising since you filed the return,
it’s generally better to send in your taxes. If your
income has fallen, you might be better off using current
documentation instead.
Second, if you drain your retirement accounts to pay
bills, you are screwing yourself every which way.
One of the unexpected ways is here, where your withdrawal
will be used against you to increase your IDR payment.
Avoid IRA withdrawals in the first place; when necessary,
use the current documentation method to keep the
withdrawals out of the IDR math.